Performance Differences between Portuguese Domestic Firms and Portuguese Multinational Firms

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Performance Differences between Portuguese

Domestic Firms and Portuguese Multinational

Firms

por

João Nuno da Silva Santos

Dissertação de Mestrado em Economia e Gestão

Internacional

Orientada por

Ana Teresa Cunha de Pinho Tavares Lehmann

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Biographic Note

João Nuno da Silva Santos was born in Figueira da Foz in November 9th, 1988. He graduated in Economics from the University of Aveiro in 2011 and entered in MSc in International Business, Faculdade de Economia da Universidade do Porto, in 2012.

Throughout his academic years he participated in student associations since his freshman year.

Professionally, he worked in a summer internship in Caixa Geral de Depósitos (2010) and another one in Jumbo Hipermercados – Aveiro (2012), did also Erasmus in Czech Republic (2009/2010) and international volunteering in Ukraine / Crimea (2013) issued by AIESEC (in FEP; in Kiev; in Simferopol).

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Acknowledgements

Since I am the product of all of my experiences and of everyone I’ve ever known, I’d like to use this section to make some acknowledgements to some people without whom this dissertation wouldn’t be possible.

First to my professor and thesis supervisor Ph.D. Ana Teresa Tavares Lehman for the incredible professionalism and patience demonstrated ever since our very first meeting. Thank you for all the help and commitment!

I’d like to thank Ph.D. Frederick Lehmann for spending his limited time helping me with STATA and for his noteworthy inputs on this dissertation.

To all the professors and colleagues from MEGI from whom I’ve learnt so much and allowed me to have such nice experience in FEP.

To all my friends from Aveiro, for the unconditional support and camaraderie. I couldn’t even describe the value you represent to me, and still you’d understand it. To all my friends from Figueira, I know I’m never around, but you are always with me.

The most special acknowledgement goes to my entire family, especially my parents and my sister. You are the anchor that keeps me from drifting away. Thank you for investing in me more than you have.

Finally, to my grandfather Frutuoso, grandmothers Esmeraldina and Fernanda and to my uncle José Carlos that sadly left us too early to see me concluding this chapter of my life. You were, are and will always be an important part of my life.

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Resumo

Embora haja vários estudos que analisam o desempenho das empresas, esta dissertação difere desses estudos na medida em que vem dar um contributo para preencher uma lacuna na literatura que se foca na comparação entre empresas que se internacionalizam para outros países através do Investimento Direto Estrangeiro e empresas que se mantêm no país de origem. Mais ainda, esta dissertação distingue-se também por fazer esta comparação focando-se no panorama português num cenário empírico alargado. Pretende-se, portanto, fazer uma comparação ao nível do desempenho entre empresas portuguesas multinacionais e empresas portuguesas meramente domésticas de modo a averiguar se há, ou não, vantagens em internacionalizar e, caso hajam, em que medidas de desempenho as vantagens / diferenças são mais visíveis.

O enquadramento teórico da dissertação baseia-se nas teorias do IDE e das empresas multinacionais (em suma, Negócios Internacionais), tais como o contributo de Hymer e o seu conceito de vantagem, o Paradigma Eclético, entre outros.

O estudo empírico foi feito utilizando dados extraídos da base de dados SABI (Sistema de Análise de Balanços Ibéricos) e foram aplicados modelos de regressão linear (Pooled OLS) e também em cross-section, considerando tanto medidas de Rentabilidade (Profitability – ROS; ROA; ROE; Profit Margin) e de Produtividade (Gross Value Added per Employee).

Os resultados sugerem que as Empresas Multinacionais têm melhor desempenho do que as Empresas Domésticas e que quanto maior for o envolvimento internacional, maior será a sua performance. Foi encontrada evidência de que estas diferenças de desempenho não são iguais entre Produtividade e Rentabilidade. A diferença de Produtividade é muito maior do que a diferença de Rentabilidade. Este estudo apresenta ainda algumas contribuições em termos de políticas a serem aplicadas.

Palavras-chave: Negócios Internacionais; Investimento Direto Estrangeiro;

Empresas Multinacionais; Empresas Domésticas; Performance; Lucro; Produtividade; Portugal.

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Abstract

Although there are many studies concerning firms’ performance, this dissertation comes with the purpose of contributing to fill a gap in the research area that deals with the comparative performance analysis in terms of firms with outward Foreign Direct Investment (OFDI) vis-à-vis others that do not undertake outward FDI. Moreover, this dissertation focuses on Portugal, on widen-researched empirical setting, in this regard. Therefore, this dissertation aims to make a comparison, performance-wise, between Portuguese multinational firms and Portuguese domestic firms in order to ascertain whether there are, or not, performance differences and, if there are, in which measures of performance these differences are more notable.

The theoretical background for this dissertation is based on FDI and the multinational enterprise theories (i.e., International Business theories), such as Hymer’s concept of advantage, the Eclectic Framework, among others.

The empirical part uses data extracted from SABI’s database and the methodology will include an econometric study with Pooled-OLS and Cross-Sectional OLS, considering some Profitability measures (ROS, ROA, ROE, Profit Margin) and Productivity measures (Gross Value Added per Employee).

The results suggest that Multinational Enterprises have a better performance than Domestic Enterprises and that the more internationalized the firm is, the better it will perform. Evidence was found that these performance gaps differ across Productivity and Profitability measures. The Productivity gap between Multinational and Domestic Enterprises is bigger than the Profitability gap. This study also presents some contributions for policy making on the matter.

Keywords: International Business; Foreign Direct Investment; Multinational

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Index of Tables

Table 1 - Literature Review on Performance Measured by Profitability Measures ... 16

Table 2 - Literature Review on Performance Measured by Productivity Measures ... 20

Table 3 - Internationalization-Performance Relationship Mainstream Perspectives ... 23

Table 4 – Manufacturing subsectors and observation count ... 28

Table 5 - Variables ... 33

Table 6 - Descriptive Statistics ... 35

Table 7 - Correlation Matrix ... 36

Table 8 - Pooled-OLS ... 38

Table 9 - Pooled OLS, Only Manufacturing ... 39

Table 10 - Pooled OLS, Manufacturing, Subsectors ... 40

Table 11 - LogGVAEMP Cross-Section ... 43

Table 12 - LogPM Cross-Section ... 44

Table 13 - LogROE Cross-Section ... 45

Table 14 – LogROA Cross-Section ... 46

Table 15 - LogROS Cross-Section ... 47

Table 16 - LogGVAEMP Cross-Section, Manufacturing ... 48

Table 17 - LogPM Cross-Section, Manufacturing ... 49

Table 18 - LogROE Cross-Section, Manufacturing ... 50

Table 19 - LogROA Cross-Section, Manufacturing ... 51

Table 20 - LogROS Cross-Section, Manufacturing ... 52

Table 21 – LogGVAEMP Cross-Section, Manufacturing with Subsectors ... 53

Table 22 – LogPM Cross-Section, Manufacturing with Subsectors ... 54

Table 23 - LogROE Cross-Section, Manufacturing with Subsectors ... 55

Table 24 - LogROA Cross-Section, Manufacturing with Subsectors ... 56

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Index of Acronyms

CAPM: Capital Asset Pricing Model DCT: Dynamic Capabilities Theory DE: Domestic Enterprise

EBIT: Earnings Before Interests and Taxes EU: European Union

FDI: Foreign Direct Investment GDP: Gross Domestic Product GVA: Gross Value Added

HFDI: Horizontal Foreign Direct Investment IJV: International Joint-Venture

M&A: Mergers & Acquisitions MNE: Multinational Enterprise

NACE: Statistical Classification of Economic Activities in the European Community OECD: Organization for Economic Co-operation and Development

OLS: Ordinary Least Squares

OPSAL: Ratio of Operating Cost to Sales R&D: Research & Development

RBV: Resource-based View of the Firm ROA: Return on Assets

ROE: Return on Equity

ROIC: Return on Invested Capital ROS: Return on Sales

SABI: Sistema de Análise de Balanços Ibéricos SMEs: Small and Medium Enterprises

TFP: Total Factor Productivity

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Introduction

The aim of this dissertation is to analyze and assess the differences in performance between Portuguese multinationals (i.e. Portuguese firms that undertook outward FDI or, in other words, that have subsidiaries abroad) and domestic Portuguese firms (those who did not conduct FDI).

The rising number of Portuguese outward FDI (UNCTAD, 2011) has not been accompanied by consistent large-scale studies. Thus, there is a need, an opportunity and an undeniable pertinence to analyze these enterprises’ performance, comparing them with the ones that did not undertake FDI abroad.

It is of foremost importance to evaluate the performance differences between multinationals (MNEs) and domestic firms in order to achieve a better understanding of the benefits of this entry mode.

Although performance is an increasingly researched matter, there are plenty of opportunities for studies concerning this topic (Bellak, 2004a; Witt & Lewin, 2007; Cardoso, 2008). Most of the studies that confront MNEs with domestic enterprises (DEs) are focused on specific matters like the contribution to the host country’s exports (Williamson, 1977), foreign ownership, firm-specific assets, firm characteristics, home country of parent firms and the transnationality of the company (Bellak, 2004b). We propose to study complementary dimensions of performance, such as productivity, profitability, export intensity, taxes, and others.

In Portugal, there is, to the best of our knowledge, only one study focusing on assessing performance differences, but between inward investors to Portugal, and Portuguese domestic firms (Cardoso, 2008). The comparison we aim to make is totally innovative in Portugal, and focused on the opposite flow.

The key research questions to be answered are:

a. Are there performance differences between Portuguese MNEs and Portuguese DEs?

b. Do these differences differ across performance measures, i.e. between productivity, profitability, export intensity, taxes and other measures?

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Concerning methodology, this study will include an empirical analysis using large-scale data on Portuguese outward investors and non-outward investors, extracted from the SABI’s (Sistema de Análise de Balanços Ibéricos) database, applying panel data models and will employ both Pooled and Cross-sectional OLS models.

The dissertation will be divided as follows. This first section presented the motivation and the object of this research. The literature review, in the second part, aims (i) to conduct an analysis of the relevant theories explaining performance differences between MNEs and DEs (ii) to contribute with a literature review on performance measurement and (iii) to review extant literature on the differences between MNEs and DEs. The third part will contain the empirical study where we aim to test empirically these differences in the Portuguese case presenting the used econometric methods, the results and offering a discussion. The final part will conclude and derive policy implications.

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Chapter 1. Theoretical Background

1.1. The Concept of Advantage

It is known that for a firm to pursue an internationalization path notably via FDI, it’s critical to have some firm-specific advantage that helps the firm overcoming the setbacks of entering a foreign market (Hymer, 1960/1976 in Ietto-Gillies, 2005; Dunning & Lundan, 2008; Lee & Rugman, 2012). In this section we provide a brief review on the firm’s specific resources and capabilities that allow it to thrive in the international environment, using Hymer’s concept of advantage and the Dunning’s Eclectic Framework to explain the importance of the firm’s ownership advantage. The Resource-based view of the firm (RBV) an explanation of the importance of the firm’s knowledge and resources that combined with the Internalization theory explains why FDI occurs. Finally, the Network Theory and the Dynamic Capabilities helps us realizing how business and personal relationships help the firm develop its international involvement and foreign market knowledge, and how this knowledge improves a firm’s ability to achieve an advantage when internationalizing.

1.1.1. Hymer’s Contribution

The theory of the MNE has long assumed that when MNEs do business abroad they face some costs (Hymer, 1960/1976 in Ietto-Gillies, 2005) that arise from economic, political and cultural differences, limited knowledge of local regulations and unfamiliarity with the local environment, governmental power (expropriations), and higher coordination costs, among others. According to Hymer (1960/1976 in Ietto-Gillies, 2005) these are “Costs of Foreignness”. Later this idea has been taken up by Zaheer (1995) and Zaheer & Mosakowski (1997) that called them “Liability of Foreignness”. So it is implied that MNEs must have some firm-specific advantages for instance the “ability to exploit economies of scale and/or scope; access to superior technology; brand recognition, or managerial skills” (Zaheer & Mosakowski, 1997:441)

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- that would allow them to overcome these costs and benefit from internationalization. Hymer, in his seminal work (1960/1976 in Ietto-Gillies, 2005), states that these advantages are linked to market imperfections. In Perfect Competition all firms would have access to every resource and FDI wouldn’t occur - market imperfections are the main motivation for FDI. Then, it’s safe to say that MNEs exist because they take advantage of these imperfections overseas. Also, some authors argue that specific factors that contribute to the liability of foreignness may change over time. For instance, the cultural knowledge of the host market may be acquired by the managers of the foreign affiliate that may adapt the managerial practices considering this knowledge (Zaheer & Mosakowski, 1997).

Overcoming the costs of foreignness (possible if the firm has some firm-specific advantages or capabilities) when internationalization occurs via FDI can lead to a better use of the advantages of transnationality, assuming that the firm has the ability to organize and control their geographically dispersed operations (Ietto-Gillies, 2002).

1.1.2. Dunning’s Eclectic Paradigm

The OLI (or Eclectic) Paradigm, developed by Dunning (1977), also addresses the matter of firms’ specific advantages and seeks to explain the existence of FDI through the simultaneous combination of Ownership, Location and Internalization advantages. Firm’s Ownership-related advantages, based on the OLI framework, include asset-specific advantages (Oa) - the possession of special intangible assets; transaction cost-minimizing advantages (Ot) - the ability to coordinate multi value-adding activities dispersed geographically; and the institutional assets (Oi) - the formal and informal institutions that regulate the processes within the firm, and between the firm and the stakeholders (Dunning & Lundan, 2008). The OLI framework also includes Internalization advantages – when there is greater benefit for the company to exploit the Ownership advantages itself instead of using non-equity solutions, such as Franchising or Licensing; and Location advantages – when the exploitation of the Ownership advantages meets the internationalization objectives of the firm. The Eclectic framework tells us that FDI will occur if, and only if, the firm can combine

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these three types of advantages. This gives an explanation to the idea that MNEs need to have an inherent advantage to overcome the costs of foreignness, and the concept of Ownership advantage is the most critical for our purposes. In fact, the Ownership advantages are of great importance when it comes to deciding where to produce, and whether the chosen location helps “it to internalize intermediate product markets” (Dunning, 1993: 80).

As Dunning (1980) highlighted in his article, the Ownership advantages can be divided into three groups. In the first are the advantages which a firm has over other firms (multinational or not) such as market position; managerial skills; R&D capacity; access to markets, etc, similar to Oa in Dunning & Lundan (2008) In the second, advantages stemming from belonging to a larger organization like the access to parent company’s capacity in terms of production, supplying, marketing. In the last group are included those advantages that arise from the multinationality of the firm, that is, the international experience puts the firm in a better position to “to take advantage of international differences in factor endowments” (Dunning, 1980: 276). This relates to Dunning & Lundan’s (2008) Ot. So Multinationality is, by itself, an Ownership advantage that may allow the MNE to “exploit fully the advantages of internalization in many countries” (Ietto-Gillies, 2005: 114).

1.1.3. Internalization Theory

This theory, based in the work of Coase (1937) and Williamson (1975) on transaction costs was developed by Buckley & Casson (1976), Hennart (1977), Rugman (1981) and others.

The larger a firm gets, the bigger its coordination costs are, depending and varying from firm to firm. As Coase (1937: 394) wrote in his seminal article: “as a firm gets larger (...) the costs of organising additional transactions within the firm may rise”. Later, Williamson (1975) introduced three concepts that help the analysis of why internalization gives advantages. They are bounded rationality, opportunistic behaviour and asset specificity. The first is about the rationality inherent to every human decision that is based in information. If the operations are carried out within the firm, the

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information about them tends to be better and less limited than when it’s externalized. Opportunistic behaviour is eliminated if the firm chooses to internalize the activities, thus eliminating at the same time the loss of control of know-how, costs structure of the operation, etc. Asset specificity influences positively the productivity when used internally, compared to when used by other firms. These are three major explanations why FDI occurs instead of firms operating through market solutions: there are often greater risks on externalizing than on pursuing in-house operations.

Given the market imperfections and uncertainty linked to market operations, Buckley and Casson (1976) assert that the main factors that lead to the internalization decision are industry- (nature of the product and market), region-, nation- and firm-specific (ability to organize and manage the market to be internalized). “Essentially, the internalization theory of the MNE is based on the assumption that transaction costs are high in transborder activities” (Ietto-Gillies, 2005: 103) and, also, it aims to preserve the firm’s ownership advantages. So the internalization choice defines a firm as a MNE through its FDI and helps the firm to dodge high transaction costs and market imperfections allowing it to benefit from it (internalization) in terms of performance, achieving better efficiency on its abroad operations offsetting those extra costs. Rugman (1981: 36, 37) also states that “the extra costs for multinationals of operating abroad are more than offset by the benefits they reap from international diversification, sales and earnings.”

1.1.4. Resource-based view of the Firm and Dynamic Capabilities

Based on the Penrosean theory (1959), on the endogenous growth of the firm, and developed by Wernerfelt (1984), the Resource-based view (RBV) of the firm sees the MNE as a result of the growth process which extends the firm beyond national borders and regards knowledge and international experience as well as other firm-related capabilities as a “valuable, unique and hard to imitate” (Peng, 2001: 820) as well as non-substitutable (Barney, 1991). Valuable in order to allow the firm to execute strategies that help improve the firm’s efficiency and effectiveness; if a valuable resource is possessed by various firms, it cannot be a source of sustained competitive

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advantage. Thus it must be unique/rare so that the firm can implement a strategy (based on that resource) that cannot be accompanied by the competition; Hard to imitate resources allow the firm to be innovative enabling itself to conceive new ground breaking strategies; Non-substitutable resources - however the difficulty to imitate a firm’s strategy or duplicate its competitive advantage, a competitor may be able to create a new different way to deal with this threat, developing its own resource/strategy (Barney, 1991). The RBV approach states that a firm’s specific advantage is based on its resources (tangible and intangible), ergo, the exploitation of firm-specific assets and also on the creation of new ones (Wernerfelt, 1984).

In the process of overcoming their liability of foreignness when internationalizing, MNEs have to figure out the timing and method of entry (Peng, 2001). As they grow successfully global, these questions start to be answered based on the firm’s international experience which can be viewed as an intangible resource. This learning process is fastened when it’s done through Mergers & Acquisitions and Strategic Alliances with local partners which “facilitate local knowledge acquisition and strengthen firm performance” (Peng, 2001: 812), giving the MNE the edge on performance differences.

Building up on the RBV, the Dynamic Capabilities theory (DCT) also sees the knowledge, know-how and managerial skills itself as an important resource to the firm’s competitiveness as it is valuable, rare and hard to imitate (and also because of its complexity) which makes it crucial to the competitive advantage creation. “Dynamic Capabilities” are the ability to adapt, change or integrate managerial skills, resources or competences in a dynamic and timely fashioned way (Teece & Pisano, 1994; Teece et al., 1997). In other words, they refer to the capabilities that will allow the firm to adapt itself to changing market circumstances. These capabilities can be divided into sub categories: Processes – the managerial and organizational routines and practices, integration, learning, reconfiguration and transformation; Positions – the firm’s technological property, customer and supplier relations, technological financial complementary and locational assets; and Paths – the strategic alternatives and opportunities (Teece & Pisano, 1994).

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In contrast to the Internalization Theory, that uses market failure as an explanation for the internalization of technology in the internationalization process, the DCT explains the same process with the level of coding capacity and the difficulty to teach or transfer each capability or resource, as knowledge or technology (Kogut & Zander, 1993; Teece & Pisano, 1994). This theory asserts that “which is distinctive cannot be bought and sold short of buying the firm itself, or one or more of its subunits” (Teece & Pisano, 1994: 541).

On a global environment and in some cases with hyper competition, the survival of the MNE would be sustained essentially on its ability to exercise difficult-to-imitate dynamic capabilities. This not only addresses the fast “innovation, adaptation and flexibility”, but also the “importance of proactive entrepreneurial behaviour” of the MNE (Augier & Teece, 2007: 185). This implies that the firm must have some capabilities that allow it to have a better response to market competitive demands.

Because the MNE operates on a global market, and as constant adaptation to market circumstances is part of the managerial routine, they are able to obtain “superior [...] performance over multiple product life cycles.” (Augier & Teece, 2007:188).

1.1.5. Network Theory

In Internalization Theory, the firm develops an intangible firm-specific advantage that gives the firm benefits on the in-house production rather than on market solutions. The Network Theory, contrarily to the “staged” and gradual internationalization theories (Johanson & Vahlne, 1977), states that these development activities depend on the relationships with other firms, that is, on the network position of the firm and its relationships with partners (Coviello & Munro, 1995). This theory features not only the firm but also the network created by itself and customers, suppliers, other business partners and their cooperative relationships (Hadley & Wilson, 2003) whether they’re industrial (formal) and social (informal) which helps the firm achieving higher growth rates (Coviello & Munro, 1995; 1997). On the other hand, a firm may become dependent on the network to create business opportunities, so the

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network may facilitate or inhibit a firm’s internationalization forcing it to diversify outside the network (Coviello & Munro, 1995; Chetty & Holm, 2000).

In the Network approach the MNE can “externalize some of its activities without losing control of its crucial intangible assets” (Johanson & Mattsson, 1988:308), eliminating the opportunistic behavior linked with other contractual entry modes. Based on this approach, the internationalization process can be done through (i) international extension – network created with local firms; (ii) penetration – development of an already existing network; and (iii) international integration – coordination of different networks (Johanson & Mattsson, 1988).

Also, when considering the Network Theory one ought not to ignore the internal network that constitutes a MNE. The MNE itself, as it is spread out geographically, constitutes an integrated web of operations which “represent an important source of innovation” as they have the “ability to sense diverse market needs, technological trends, and competitive actions” (Bartlett & Ghoshal, 1998: 102).

As suggested by Zanfei (2000), MNEs gain access to local knowledge and capabilities, through affiliates located abroad and their relations. In fact this might be one way to overcome the costs of foreignness. Given that a MNE is an international web of (internal and external) relations, i.e. network, they can reach to more sources of innovation that will allow them to perform more efficiently. Hence, networks may be beneficial to innovation and to the technological development of the firm.

1.1.6. Final Remarks

We have asserted that a firm, in order to be successful in its internationalization process, must have some internal advantage(s) that would help them overcoming their liability of foreignness. Dunning’s Eclectic Paradigm gives us an important approach to why FDI occurs, explaining that the firm should have, once again, some ownership, location and internalization advantages simultaneously. The ownership advantages, that are central to this study, like a firm’s international experience and multinationality, reflect the ability to keep internationalizing successfully. The internalization theory provides us an explanation to why FDI occurs (that is also central to the Eclectic

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Paradigm) and to when it is better to invest abroad through internal operations instead of contractual modes. So when FDI occurs, it’s because there are advantages in doing it, thus explaining the idea that there must be differences between those firms who internationalize through FDI and those who don’t. As to the RBV and Dynamic Capabilities, this approach states that in the firm’s resources and capabilities are the main competitive advantage. Through an internationalization and geographic spreading process, these resources tend to develop themselves as the firm grows its knowledge on the foreign market. The Network theory builds upon this as well. As the firm uses its internal and external networks to benefit from their knowledge on foreign markets, they are introduced to new networks. This will ultimately result in a great expansion not only in the business connections and partners, but also in a firm’s ability to benefit from it.

Chapter 2. Literature Review

2.1. Firm Performance Measures

Before jumping to the literature review of the relationship between internationalization and performance, we want to first show what kind of proxies were used in previous studies. In this literature review, we found that performance can be measured in many different ways – through profitability measures, productivity measures or others.

2.1.1. Profitability

Concerning profitability, the most used proxies were the financial ratios such as Return on Sales (ROS), Return on Assets (ROA) and Return on Equity (ROE). We also found other profitability measures such as Gross Profit Margin (Elango, 2006), Tobin’s Q (Chari et al., 2007), EBIT (Chen & Hsu, 2010) that will also be presented.

Concerning ROS, Grant (1987) when he studied British firms and their multinationality and performance, used different measures do assess the performance of

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his sample. One of the measures used as proxy was ROS and the result was that overseas production to total sales ratio had positive impact on firms’ ROS and that multinationality has positive impact on performance on a thirteen-year period. Geringer et al. (1989) using ROS to assess the performance implications of diversification and internationalization strategies for US and European MNEs found that there is indeed a positive relationship between internationalization and firm performance but only until a certain point – inverted u-shaped relation which will be addressed later. Luo & Tan (1998) used also ROS and ROA on their comparison between MNEs and DEs performance, concerning the strategic choice (defensive; prospector; analyzer)1 when internationalizing, in an inward perspective of FDI and found that local firms adapt themselves to the entry of foreign firms. Foreign firms can keep their levels of performance, domestic firms improve their performance because they don’t take the internationalization risks and have to innovate in order not to keep competing. Lu & Beamish (2001) with a study focused on Japanese Small and Medium Enterprises (SMEs) found that exporting had a negative linear relationship with performance, mostly because of the appreciation of japanese Yen and that FDI had a nonlinear relationship with performance – u-shaped. Capar & Kotabe (2003) with a sample of 81 service firms found that international diversification has positive impact on performance after a certain level/weight of foreign operations on the firm’s total operations (multinationality). Contractor et al. (2003) found a three-staged relationship between performance and multinationality, using ROS as measure of performance for 103 firms. Qian et al. (2003) also studied the SMEs in a four-year period using ROS as measure and found that MNEs outperformed domestic firms and concluding that higher the international involvement is, the better they will perform. Brock et al. (2006) with a sample of law firms from the USA and UK found different patterns of effects in those countries but the overall effect, homogeneous to the entire sample, was that international diversification had positive impact on performance after a certain point of

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The “Prospector” is a high risk strategy focuses on product development by “scanning, identifying, and capitalizing on (…) market opportunities” (Luo & Tan, 1998:24). It’s often connected to first mover strategy and firms adopting this strategy are always looking for market opportunities (Miles & Snow, 1978). The “Defensive” strategy consists on the opposite of the Prospector strategy as the firm maintains its secure and stable position in the market rather than advancing to new product development programs or searching for new opportunities (Miles & Snow, 1978). The “Analyzer” strategy is the place in between the previous strategies. Less risks than prospector strategy but also less commitment to a stable position.

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foreign involvement. Besides ROS, they also used Profits per Equity Partner as performance measure. Chiao et al. (2006) also using ROS found that internationalization has positive impact in firm’s performance in both industries studied (Electronics and Textile) which also showed a nonlinear relationship. Coombs & Bierly (2006) in their study on technological capability and its implications on performance, using a sample of 201 manufacturing firms and combining it with many proxies, found that investing in technology development would increase shareholder return. Their study has a different object and purpose of our own in terms of multinationality-performance relationship, but it does provide a different perspective on multinationality-performance measurement. Contractor et al. (2007) analyzed the relationship between international expansion and performance, in India, using not only ROS but also ROA and ROE as performance measures. Their findings were consistent with the U-shaped relationship in the manufacturing firms’ sample.

Return on Assets is another ratio used as performance measure. Buckley et al. (1984) used this measure (Net income to Assets ratio) as a proxy for profitability when analyzing the growth of firms between 1972 and 1977. As result they concluded that multinationality does not necessarily have an impact on performance. Grant (1987) also used this ratio but in a different version (“Pre-tax, pre-interest profits as percentage of Net Assets”, Grant, 1987:84) but also responded positively to a change in overseas production. Geringer et al. (1989) also used ROA which revealed the same results as ROS: the degree of internationalization has positive impact but only until a certain point, then it stops being productive and the performance starts to decay – inverted u-shaped relationship. Luo & Tan (1998) whose study was already referred in the previous paragraph, used ROA as performance and arrived at the same results for both measures. Gomes & Ramaswamy (1999) also using ROA (among others measures) stated that multinationality brings positive performance impact but only until the optimal point. Lu & Beamish (2001), having both ROS and ROA highly correlated, confined the results to ROA having reach the conclusion that there is a nonlinear impact of multinationality on performance. Kotabe et al. (2002) on their study focused on R&D and its role concerning performance and multinationality, used ROA as proxy to measure financial performance and found that multinationality not only impacts positively on performance, but also that this impact is due to R&D and Advertising

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expenditures and intensity. Contractor et al. (2003) also used ROA reaching the same results that were discussed in the previous paragraph as there was a certain degree of collinearity between ROS and ROA. Lu & Beamish (2004) analyzed the veracity of the s-curve hypothesis applied to Japanese firms. Using ROA, they found that there is consistency for their hypothesis and also that the higher the investment in technology and in advertising, the higher the profitability. Barbosa & Louri (2005) in their comparison between foreign-owned and domestic-owned firms in Greece and Portugal concerning the importance of ownership in performance, using ROA as measure, found that in Greece foreign-owned firms perform much better than domestic-owned. Coombs & Bierly (2006), as said before, used many different proxies when measuring the impact of technological capability on performance and to what concerns ROA their findings were that the ratio R&D Expenditures to Total Sales had negative impact on performance. Contractor et al. (2007) found that, for ROA, for manufacturing firms the higher Foreign Sales to Total Sales ratio, the lower the firms perform, as the opposite goes for services firms. So internationalization benefits more the Indian services firms than the manufacturing ones. Kimura & Kiyota (2007), using ROA and other measures, found that foreign-owned firms have superior static indicators and are able reach higher and faster levels of growth when comparing with domestic firms. Using different proxies, Adenaeuer & Heckelei (2011) analyzed the connection between FDI and performance of European agribusiness firms. Concerning ROA, they found no difference of performance.

Return on Equity is the last of the most popular/used ratios. Grant (1987) also used this measure and results are not different than the previous ones (see two previous paragraphs). Chiang & Yu (2005) on their study focused on Taiwanese firms concluded that there is also a positive impact until a certain point. Coombs & Bierly (2006) state that although they use ROE as performance measure, it can be influenced by both changes in debt and equity as well as in the interest rate paid on debt making it difficult to understand if its behavior. Hsu (2006) also studied the s-curve hypothesis on 55 pharmaceutical companies in a four-year period. Using ROE as measure, the main finding was that companies benefit from internationalization activities but could not prove the existence of the s-curve for his sample. Contractor et al. (2007) found a proportional relationship between Foreign Sales to Total Sales ratio and ROE, being

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that this relationship is nonlinear. Kimura & Kiyota (2007) and Adenaeuer & Heckelei (2011) used this measure as well and the results were presented in the previous paragraphs, as they don’t differ across measures.

Other profitability measures were found in studies like the one carried out by Michel & Shaked (1986) which used market-base measures such as the Risk-adjusted Return using the Sharpe, Treynor and Jensen measures2 and applying the Capital Asset Pricing Model (CAPM) to obtain the betas. As result they found that although MNEs are bigger in terms of firm size, it does not explain the findings in which DEs present higher risks suggesting that the latter ones have better performance. Collins (1990) also used Sharpe, Treynor and Jensen measures to assess the Risk Return in a comparison between US firms that were active in domestic, developed and developing countries. He found that firms operating on domestic market and developed countries got higher returns and higher risk measures, hence higher performance. He also found that there were higher rates of return for FDI and that there was no benefit in diversifying to developing countries as they presented low risk and low return.

Benvignati (1987) used a rate of profit calculated using Operating Income in each line of business minus the estimated capital costs divided by sales. The main finding of this study was that multinational firms have higher profits than the firms operating solely in domestic industries. Gomes & Ramaswamy (1999) in order to account for Operational Outcomes used “a ratio of operating cost to sales (OPSAL)” (Gomes & Ramaswamy, 1999:181) and also found a nonlinear relationship. Kotabe et al. (2002) besides using ROA, also used Sales to Operating Costs ratio to evaluate the Operational Outcome and the results were similar to the ones concerning ROA in the same study.

Elango (2006) in order to assess the impact of internationalization on performance used Gross Profit Margin as profitability measure. He analyzed this relationship for 12 emerging markets and the main findings were a nonlinear relationship for manufacturing firms and a positive linear relationship for services firm.

Some authors used Tobin’s Q as their proxy. Lu & Beamish (2004) studied the impact of international diversification on performance and also used ROA and the

2_{Sharpe and Treynor measures “determine the premium of a security’s return per unit of risk” and Jensen}

“evaluates the difference between the security’s expected return and its actual return” (Michel & Shaked, 1986:93).

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results were that higher advertising expenditures and investment in technology lead to greater profitability. Chari et al. (2007) also analyzed the importance of technology investments on the relationship between international diversification and firm performance and found that multinationality impacts positively in a firms’ performance, especially if it’s a firm with high technology investment.

Chen & Hsu (2010) using Earnings Before Interest and Taxes (EBIT) as proxy for performance measurement, analyzed a sample of Taiwanese firms in a 5 year period and found a nonlinear relationship between internationalization and performance and also between advertising expenditures and performance. They also found that R&D expenditures have positive impact on performance.

Adenaeuer & Heckelei (2011), as said before, used many different measures and found that firms undertaking FDI had better Revenues, Profits before Taxes and Profit margins than the domestic counterparts. These results were the same for other proxies such as Return on Invested Capital (ROIC). Chang & Rhee (2011) also used ROIC to evaluate how important was the speed of the internationalization process in terms of firm performance. They found that rapid FDI has no main effect on firm performance unless the firm has high marketing capabilities or strong brand equity, and that fast international expansion is more favorable for industries facing intense global competition.

Assaf et al (2012) using Total Costs logarithmized found that cost efficiency could increase performance if the internationalization process was undertaken majorly through Mergers & Acquisitions (M&A) and done in an early stage of internationalization process. So it is a remark on how fast the internationalization process should be. They also found a counterproductive home country effect, i.e., if home country GDP increases, there would be lesser gains from the internationalization process in terms of performance.

The Table 1 sums the studies that used Profitability as measure and their results as well.

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Table 1 - Literature Review on Performance Measured by Profitability Measures Authors Year Title Sample Measures

Used Result

Adenaeuer

& Heckelei 2011

FDI and the performance of

European Agribusiness Firms

1687 firms with plants only in EU-15; 314 firms with in

and out of EU-15

Profitability & Productivity

Advantage MNE

Chen & Hsu 2010

Internationalization, Resource Allocation and Firm

Performance 224 Taiwan Stock Exchange-listed electronics & IT firms (2000-2005) Profitability Advantage MNE Chari, Devaraj & David 2007 International diversification and firm performance: Role of Information Technology Investments

131 firms, 1997 Profitability Advantage MNE Contractor, Kumar & Kundu 2007 Nature of the Relationship between international expansion and performance: The case of emerging markets firms 269 Indian firms, 1997-2001. 142 manufacturing; 127 services Profitability Advantage MNE Kimura & Kiyota 2007 Foreign-owned vs. Domestically-owned firms: economic performance in Japan 22.250 firms (21.716 DEs; 534 MNEs) between 1994 and 1998) Profitability & Productivity Advantage MNE Brock, Yaffe & Dembovsky 2006 International diversification and performance: a study of global law

firms 76 US firms; 13 UK firms (2003) Profitability Advantage MNE Chiao, Yang & Yu 2006 Performance, Internationalization and Firm-Specific Advantages of SMEs in a Newly-Industrialized Economy 1419 Taiwanese SMEs (1996). 818 electronics industry + 601 textile Profitability Advantage MNE Elango 2006 An Empirical Analysis of the Internationalization-Performance Relationship Across Emerging Market Firms

719 firms from 12 emerging markets. 393 manufacturing,

326 services

Profitability Advantage MNE

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Hsu 2006 Internationalization and Performance: The S-curve Hypothesis and Product Diversity Effect 55 global pharmaceutical/ biotechnological firms; (1996-2000); many countries Profitability Advantage MNE Barbosa & Louri 2005 Corporate Performance: Does ownership matter? A comparison of Foreign- and Domestic-Owned Firms in Greece and

Portugal 523 Portuguese firms (1992); 2651 Greek firms (1997) Profitability Inconclusive Chiang & Yu 2005 The Relationship between Multinationality and the Performance of Taiwan firms 119 Taiwanese Companies, 1998-2002 = 595 observations Profitability Advantage MNE Lu & Beamish 2004 International Diversification and Firm performance: the s-curve hypothesis 1489 Japanese firms, 1987 to 1997 Profitability Advantage MNE Capar & Kotabe 2003 The Relationship between International Diversification and Performance in Service Firms

81 German service firms

(1997 - 1999) Profitability Advantage MNE Contractor, Kundu & Hsu 2003 A three-stage theory of international expansion: the link

between multinationality and performance in the service sector 11 service industries, 103 firms Profitability Advantage MNE Qian, Yang & Wang 2003 Does multinationality affect profit performance? Na empirical study of SMEs

271 US firms (1993-1997) Profitability Advantage MNE Kotabe, Srinivasan & Aulakh 2002 Multinationality and Firm Performance: The Moderating Role of R&D and Marketing Capabilities 49 US firms from 12 different industries; 1987-1993 Profitability Advantage MNE

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Lu & Beamish 2001 The internationalization and Performance of SMEs

164 Japanese SMEs from19 different industries, as defined by the Nikkei stock

market (1986-1997) Profitability Advantage MNE Gomes & Ramaswamy 1999 An empirical examination of the form of the relationship between multinationality and performance 95 firms (28 chemicals; 14 drugs and pharmaceuticals; 24 computers and computer

office; 29 electrical products)

Profitability Advantage MNE

Luo & Tan 1998

A comparison of multinational and domestic firms in an emerging market: a strategic choice perspective

60 state Chinese firms (electronics industry); 51 MNE subunits Profitability Inconclusive Collins 1990 A market performance comparison of US firms active in Domestic, Developed and developing countries 133 firms (51 domestic, 44 in developed countries, 38 in

developing countries), from January 1976 to June 1985 Profitability Advantage MNE Geringer, Beamish & DaCosta 1989 Diversification strategy and internationalization implications for MNE performance

200 MNE (US and

European), 1982 - 1983 Profitability Advantage MNE Benvignati 1987 Domestic Profit Advantages of Multinational Firms 2635 lines of business of 457 US manufacturing firms, 1975 Profitability Advantage MNE Grant 1987 Multinationality and performance among British manufacturing companies

304 large firms, 1972-1984 Profitability Advantage MNE Michel & Shaked 1986 Multinational Corporations vs. Domestic Corporations: financial performance and characteristics 58 US-based MNEs; 43 DMCs; 1973 - 1982; Profitability Advantage DE Buckley, Dunning & Pearce 1984 An analysis of the growth and profitability of world's largest firms between 1972 and 1977 535 firms in 1972, 866 firms in 1977; US and non-US firms. Profitability Inconclusive

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The majority of these studies conclude in favour of an advantage for MNEs, allowing us to hypothesize, as purpose for our study, as follows:

H1: MNEs have higher profitability than DEs.

2.1.2. Productivity

As Productivity measures, our literature review revealed different points of view. Total Factor Productivity may be the most used by authors focusing their analysis on productivity (Kimura & Kiyota, 2007; Temouri et al., 2008; Adenaeuer & Heckelei, 2011; Hayakawa et al., 2013).

Davies & Lyons (1991) in their study used Gross Value Added as productivity measure and as result they found that foreign-owned firms have better productivity than domestically-owned. They also state that the transfer pricing has a major role on this performance difference. Al-Obaidan & Scully (1995) used Labour to Sales and Labour to Output ratios to analyze the benefits of multinationality for a sample of oil companies and as conclusions they argue that for the oil industry it is better to internalize some markets in order to overcome some costs of being foreigner. Girma et al. (2004) used Sales, Value Added and Net Profit all divided by the number of employees. This way, they were able to evaluate the efficiency of having more (multinationals) or less (domestic firms) employees and the first ones got the better results. Anastassopoulos et al. (2007) also used a “per employee” ratio, this time with Turnover in the nominator, and found that MNEs outperform the Domestic competitors. They also analyzed the ownership matter comparing majority owned MNEs to minority owned MNEs reaching the conclusion that the latter perform better as they make use of local knowledge. Adenaeuer & Heckelei (2011) used Revenue per Employee, Labour Costs per Employee and Profit per Employee in their study. They found greater productivity in MNEs than in DEs but state that this was not related to also greater labour productivity.

Total Factor Productivity (TFP), as said before, is the most used measured when it comes to productivity analysis. Kimura & Kiyota (2007) besides ROA and ROE, also used TFP and its results were the same as the ones for profitability measures. Temouri

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et al. (2008) used TFP to analyze productivity differences between MNEs and DEs in Germany. The result was that DEs were less productive than German MNEs and foreign MNEs showed the productivity advantage in some industries. Hayakawa et al. (2013) wanted to measure the impact of outward FDI on performance at Japanese firms using TFP and found differences of outcomes between horizontal FDI (HFDI) and vertical FDI (VFDI). HFDI had few impacts on production workers and cost efficiency as VFDI showed few changes in firms’ performance in home country.

The Table 2 sums the studies that used Profitability as measure and their conclusions as well.

Table 2 - Literature Review on Performance Measured by Productivity Measures

Authors Year Title Sample Measures Used Result

Hayakawa, Matsuura, Motohashi & Obashi 2013 Two-dimensional analysis of the impact

of outward FDI on performance at home:

Evidence from Japanese manufacturing firms

Sample 1: all Japanese firms with more than 50 employees; Sample 2: constructed by aggregating the manufacturing plant-level

census data, Census of Manufacturers on a firm basis; 1992 to 2005 Productivity Advantage MNE Temouri, Driffield & Higón 2008 Analysis of Productivity Differences among Foreign and Domestic Firms: Evidence from

Germany

22 manufacturing firms; 17

service firms; 1995-2004 Productivity

Advantage MNE Girma, Gorg & Strobl 2004 Exports, international investment, and plant

performance: evidence from a

non-parametric test

Manufacturing plants in Republic of Ireland with more than 10 employees;

year 2000. Productivity Advantage MNE Ramstetter 1999 Comparisons of Foreign Multinationals and Local Firms in Asian

Manufacturing Over Time

firms from Hong-King; Malaysia; Indonesia; Singapore; Taiwan; 1970 to 1996 Productivity Advantage MNE Al-Obaidan & Scully 1995

The Theory and measurement of the net benefits of multinationality: the case of the international petroleum industry 44 oil companies, 1976-82;

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Davies & Lyons 1991 Characterizing relative performance: The productivity advantage of foreign

owned firms in the UK

(1971-1987) Productivity Advantage MNE

Source: Own elaboration.

As we can see all, except one, studies point to a clear advantage of the MNE when using Productivity measures. Thus, based on the reviewed literature, we hypothesize:

H2: MNEs have higher productivity than DEs.

2.1.3. Other Measures

Brewer (1981) used stock return to study whether it was more profitable to invest in a MNE or DE and found that the latter cannot provide benefits like the ones MNEs help achieve. Geringer & Hebert (1991) wanted to analyze the performance of International Joint-Ventures (IJV) and they measured it through survival, stability and duration of the IJV using binary variables for the first two, that is, whether or not the IJV was still operating “from the time of its formation until 1988” (Geringer & Hebert, 1991:254); for Stability the dummy was based on whether there were changes in IJV equity; Duration’s measurement was done using “the number of years between the IJV’s formation and either its termination or the collection of performance data” (Geringer & Hebert, 1991: 255).

Over the years, the study of the relationship between internationalization and performance has emphasized the importance of different variables that might have an impact on this relationship, like International Diversification that may derive from the weight of employees deployed abroad (Brock et al., 2006), or from Foreign Sales to Total Sales ratio (Capar & Kotabe, 2003; Elango, 2006; Contractor et al., 2007) or Level of Internationalization derived from the “number of foreign countries in which they had subsidiaries in a given year” (Chen & Hsu, 2010: 1106); Firm Size as the logarithmic number of employees (Barbosa & Louri, 2005; Brock et al.,2006; Capar & Kotabe, 2003), as “logarithmic function of total assets” (Chiang & Yu, 2005: 132) or as

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“the natural logarithm of total sales” (Contractor et al., 2007: 410) among others. For a better understanding of a firm’s performance, there were also included industry-specific measures for a better analysis of the firm’s market environment – Industry Growth; Intensity of Foreign Firms in the Industry, R&D Expenditures (Barbosa & Louri, 2005).

2.2. The internationalization-performance relationship

Nowadays we have four mainstream perspectives concerning the nature of the relationship between internationalization / multinationality and performance. As the following table shows, there is no consensus among the authors. The first model (Grant, 1987; Elango, 2006) finds a linear relationship, i.e., when a firm expands its business overseas increasing their degree of multinationality, there is a linear impact and response of the firm’s performance. Some authors, like Capar & Kotabe (2003), Contractor et al. (2007) and Chen & Hsu (2010) found a nonlinear relationship in which the degree of multinationality, at first, was counterproductive in terms of impact on performance, but only until a certain point. “Beyond that threshold, the benefits of multinational diversification may outweigh the relevant costs involved, thereby generating performance gains” (Mathur et al., 2001: 576), hence the U-shaped relationship. On the opposite hand, the Inverted U-shaped Relationship shows that increasing levels of internationalization impact positively on performance only until a certain break-even point is passed where we can find the optimum level of internationalization. After that, there’s negative impact on performance. As to the S-shaped Relationship, it’s characterized by the use of the time variable in a three-stage model proposed by Contractor et al. (2003) where we have negative impact in a first stage which like the U-shaped relationship indicates losses from the internationalization process, then we see a positive slope in the second part indicating a recovery of those losses and compensating them, and finally the negative slope in the third stage.

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Table 3 - Internationalization-Performance Relationship Mainstream Perspectives Theory Graphic Shape Performance Measure Reference Linear Relationship

Sales Growth; RONA;

ROS; ROE Grant (1987) ROA Grant et al. (1988)

ROS Tallman & Li (1996) Gross Profit Margin Elango (2006)

U-shaped Relationship

ROE; ROA; Pretax

Operating Margin Mathur et al. (2001) ROS Capar & Kotabe

(2003) ROA Ruigrok & Wagner

(2003) ROA; ROE; ROS Contractor et al.

(2007) EBIT Chen & Hsu (2010) Cost Efficiency Assaf et al. (2012)

Inverted U-shaped Relationship

ROS Brock et al. (2006) ROE Chiang & Yu (2005) ROS Chiao et al. (2006) Gross Profit Margin Elango (2006)

ROS; ROA Geringer et al. (1989) ROA; Ratio of Operating Costs to Sales Gomes & Ramaswamy (1999) S-shaped Relationship ROS;ROA Contractor et al.(2003) ROE; ROA Thomas & Eden

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Source: Own elaboration based on Cardoso (2008).

2.3. MNE vs. DE Performance

Concerning performance gaps between MNEs and DEs, and to the best of our knowledge, there are few studies that focus on the comparison between MNEs and DEs concerning OFDI. Nevertheless, there are those which compare these two in different situations (e.g. Imbriani et al., 2011; Hayakawa et al., 2012). The studies we found and analyzed come up with three outcomes: (a) MNEs have better performance than DEs; (b) DEs outperform MNEs and (c) some cases were inconclusive or with some complex

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interpretation. Thus we divided this section by those three outcomes and presenting, lastly, a table summarizing our performance comparison literature review.

2.3.1. MNEs have superior performance than DEs

From the studies included in Annex I, the majority of them presented the conclusion that MNEs outperform DEs. Some of these studies focused their research on Asian countries (Ramstetter, 1999; Lu & Beamish, 2001, 2004; Chiang & Yu, 2005; Chiao et al., 2006; Contractor et al., 2007; Kimura & Kiyota, 2007; Chen & Hsu, 2010; Hayakawa et al., 2012), other used European firms (Davies & Lyons, 1991; Capar & Kotabe, 2003; Girma et al., 2004; Anastassopoulos et al., 2007; Temouri et al., 2008; Imbriani et al., 2011) or US firms (Brewer, 1981; Benvignati, 1987; Grant, 1987; Lee & Kwok, 1988; Geringer et al., 1989; Qian et al., 2003; Brock et al., 2006). Besides Imbriani et al. (2011) which used a binary dependent variable (to be or not a multinational) with matching techniques as main methodology, almost all used Profitability measures as proxy for performance. Others used Productivity (Davies & Lyons, 1991; Ramstetter, 1999; Girma et al., 2004; Temouri et al., 2008; Hayakawa et al., 2013) or both (Anastassopoulos et al., 2007; Kimura & Kiyota, 2007; Adenaeuer & Heckelei, 2011).

2.3.2. DEs have superior performance than MNEs

Concerning the studies which found the opposite of the previous ones, we have a total of three. Michel & Shaked (1986) used the Risk-adjusted Return to analyze the differences between MNEs and DEs and found that DEs have superior risk-adjusted performance, thus having higher total and systematic risk providing a higher return, for all their measures (Sharpe, Treynor and Jensen).

Kim & Lyn (1990) used some financial and accounting-based ratios (Earnings per Share; ROE; Gross Profit Margin and Operating Profit Margin) to assess if foreign-owned firms operating in US enjoyed advantages over US firms operating solely in their

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domestic market. Although US firms spend less in R&D and in Advertising than foreign-owned firms, they tend to be more efficient than the latter.

Mathur et al. (2001) with a sample of Canadian firms studied differences between local and multinational firms. Using ROE, ROA and Pretax Operating Margin they found that DEs have better performance for all the proxies in all of the sample time period. They also tested for internationalization effect on firm performance and found a nonlinear relation between these two similar to the u-shaped theory.

2.3.3. Inconclusive cases

There were some cases we found whose final conclusion wasn’t as consistent as they should be or couldn’t be just labeled as only advantage for one side for having many conditions to its conclusions. Buckley et al. (1984) studied the growth and profitability of many US and non-US firms in the 1970s. Using sales growth rate and profitability (proxied by Net income to asset ratio), they’ve reached some inconsistent results being that for one of the sample’s years the results were insignificant for the full sample. So multinationality couldn’t even be accounted as contributor for the variance in growth and profitability of both sets of firms.

Al-Obaidan & Scully (1995) used productivity measures to analyze the net benefits of multinationality. As result they found that (a) multinationality increases efficiency and reduces business risks and at the same time (b) it causes reduction in firm’s overall efficiency because of the costs incurring from the internationalization process. They state that the best strategy may be internalizing some markets so that the benefits could overcome costs (Internalization Theory).

Luo & Tan (1998) compared MNEs and DEs in the Chinese electronic industry with profitability measures (ROS, ROA, Average Sales Growth). In this case, the result of their study was inconclusive because their comparison was based on the strategic behavior and philosophy of the firm (Defender; Analyzer and Prospector). They found that MNEs and DEs did not imitate their competitor hence adjusting to the market. MNEs follow mostly an Analyzer strategy as in the case of Local firms in order to

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protect their market position adopted a Defender posture. Each thrived in their own way not having a significant difference in terms of performance.

Barbosa & Louri (2005) also compared domestic and foreign firms but focusing the ownership influence on performance (ROA). For the Greek sample they actually found that foreign firms perform better than domestic but for the Portuguese one there were no significant differences. Given these different results we couldn’t just label this study as “Advantage MNE” as there was an inconclusive part in the study.

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Chapter 3. Methodology

3.1. Data

This study uses firm-level data extracted from the SABI (Sistema de Análise de

Balanços Ibéricos) – Bureau van Dijk’s database (last update on January 6th, 2014), which contains financial and corporate information on 500 thousand and 2 million firms located in Portugal and Spain, respectively.

The main purpose of this dissertation is to assess whether there are differences in performance between Portuguese DEs and Portuguese MNEs, and, if so, in what performance variables are those differences more relevant. The present analysis implies that we needed two samples to work with (Portuguese DE and Portuguese MNEs). Due double counting problems, we needed to extract a third one, containing foreign-owned firms that would allow us to purge the duplicates on the first two samples. Initially, all samples were extracted for the period between 2002 and 2012, but later we found that this period did not granted us the data quality we needed. Thusly we shortened it to a 5 year period between 2008 and 2012.

The criteria set for the extraction was as follows. In order not to get our database biased by the size of the much smaller enterprises, we set the minimum of employees for each firm to be 10 employees. This number is based on the European Union definition of a Micro Companies. Since we also need to guarantee the multinational status and the domestic status for our samples and to differentiate DEs from domestic MNEs from foreign MNEs, we used a criterion based on OECD benchmark definition for Foreign Direct Investment – “10% or more of the voting power of an enterprise resident in one economy by an investor resident in another” (OECD, 2008: 48, 49). So for the Sample 1, that is the DE sample, we set that (1) the owner has to be Portuguese and owning at least 90% and (2) companies must have 10 or more employees, thus excluding Micro-Companies (European Union-based nomenclature). The Sample 2, relative to the Portuguese MNEs was extracted with the following criteria: (1) Portuguese firms with foreign subsidiaries owned by at least 10%; and (2) also must have 10 or more employees. Since we need to eliminate the duplicated observations

Performance Differences between Portuguese Domestic Firms and Portuguese Multinational Firms